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Agriculture risk management and role of insurance

1.
Agriculture Risk Management and Role
of Insurance – Indian Context

2.
Key Risks in Agriculture Sector
Production or Yield Risk
Market Risk
Asset Risk
Operational Risk
Institutional Risk
Financial Risk
Personal Risk
In India, the Agriculture sector
is specifically exposed to high
risks due to weather conditions
due to:
•High dependence on rainfall
•Limited irrigation facilities
•Weak institutional structures
•Low use of technology
Variation in Weather
Conditions and Natural
disasters is a risk faced the by
agriculture sector which affects
the production and incomes of
farmers

4.
Crop Insurance – Key Advantages
Crop insurance is a means to protecting the cultivators against
financial loss on account of anticipated crop-loss arising out of
natural factors beyond their control such as natural fire, weather,
floods, pests, diseases etc.
Key Advantages:
Crop Insurance is a means to protect the farmer against the risks faced due to
natural factors
It helps to minimise the loss to the farmers incomes due to uncertainty and
guarantee a minimum level of income/ return
Crop insurance can serve as collateral for operating loans which improves
producers’ access to credit
In times of volatile prices, crop insurance helps protect revenue
It provided greater profitability over long term
Reassurance to farmers

5.
Crop Insurance – Key Advantages
Crop insurance is a more efficient risk management tool than
traditional strategies such as crop diversification, inter-cropping,
mixed farming, integration of farm
It promotes farmers to allocate resources so as to maximise returns,
since farmers are assured of financial compensation against any
loss
It encourages farmers to take more risk by way of growing more of
the most profitable crops and adopt advanced technologies
Crop insurance not only protects the farmers against natural
disasters, shocks adverse weather conditions, but also acts as
incentive to use the resources efficiently and achieve higher level of
productivity
In the long run, it enhances the risk taking abilities of producers by
allowing them to invest in technological investments as well as produce
high yielding (high risk) crops eventually leading to higher production and
productivity

6.
Risk management can unleash
opportunity. Risk management tools—
such as improved information, crop
insurance, and employment
diversification— can help people mitigate
risk. The ability to mitigate risk, in turn,
can allow people, especially the poor, to
overcome their aversion to risk and be
more willing
Source: World Development Report, 2014
‘Farmers in Ghana and India have
been more willing to take on risk in
search of higher yields—
increasing their investments in
fertilizer, seeds, pesticides, and
other inputs—because they have
rainfall insurance. When
aggregated, these gains can have
much broader effects, contributing
to improved productivity and
growth for a country as a whole’
Source: World Development Report,
2014

7.
Models of Crop Insurance
• Traditional Crop Insurance
• The sum insured could be the total expenditure or a
multiple of it or a proportion of expected income from
crop(s) for which premium is paid
• The indemnity/ claims payable is payable on the basis of
shortfall in average yield from the guaranteed yield
(threshold yield)
• The claims are paid after the loss in yield is ascertained
Yield Based
Insurance
• Weather based Crop Insurance
• Weather insurance uses weather parameters as ‘proxy’ for
crop yields in compensating the cultivators for deemed crop
losses due to reduction in yield
• Payouts are linked to a measurable index, such as the
amount of rainfall over a given period or commodity prices at
a given date
• Rainfall insurance is a specific form of Weather Insurance
Index Based
Insurance

9.
Crop Insurance in India
The use and coverage of rainfall insurance has increased, but still
remains limited
Weather-based crop insurance has many inherent advantages, but is
faced with many constraints:
sparse network of weather stations
lack of high quality weather data for locations
high premium rates for farmers
limited scope of weather insurance
Weather-based insurance can act as collateral for encouraging
banks to lend more liberally to the agriculture sector
Weather indices can be used to make early payouts in area covered
by yield crop insurance
Weather Insurance, with low administration costs and absence of adverse
selection and moral hazard, is more suited to small farmers in rainfall dependent
country like India

10.
Mutual Insurance
Another form of insurance is Mutual Insurance
Key features:
Sharing risk – cooperation between public and private sector
Socially responsible and sustainable orientation through
stakeholder cooperation
Instruments for risk retention risk-risk reduction by means of
prevention and self-regulation
Risk analysis models and data collection, clear risk calculation
models
It is being implemented in Netherlands and has been well
received by the farmers